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Ruminations on Rationality

A key assumption in economics is the assumption of rationality on the part of economic actors. This assumptions tends to be controversial, especially among non-economists. However, I want to argue that the nature of the assumption has implications beyond just the economic model implications. Implications that are applicable to all sciences, not just economics.

Let’s first begin by defining what we mean by rationality. All rationality means is that actors move forward toward a goal based on the information they have. Since that information is not perfect, their actions may not be perfect in achieving that goal, but generally speaking people, once they make a decision, will move purposely. For example, a hungry person would rationally move toward trying to eat: buying food, stealing food, forging, etc. All of these are rational actions.

What can this assumption mean beyond economic models? I think, from a scientific point of view (or, at least, a social scientific point of view), the rationality assumption forces humility on the part of the analyst. If we assume the actor is rational, then we look at any action he takes as purposeful, even if we ourselves wouldn’t take such an action. In short, it forces us to ask the question “why does this outcome occur?” It forces us to avoid, or at least question, to urge to direct another through policy or “nudges.” If Jones takes an action, it is likely because Jones views that action as the best of the available alternatives to his best knowledge.

In the social sciences (and in this, I am including political science), i think the rationality assumption provides both awesome insight and forces humility on the part of the analyst, a valuable trait to remaining unbiased and avoiding what Hayek called “the pretense of knowledge.”

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3 thoughts on “Ruminations on Rationality”

Jon,

It seems to me what you are offering here is a tautology. There’s nothing necessarily wrong with that. Definitions are important and are an excellent place to start any discussion. But let’s not confuse them with the arguments that are where the real controversies lie.

Are there really people who people who are arguing that people don’t act based on the information they believe they possess and towards goals they understand themselves to intend? If so, who are these people? Do we know their names?

I assume you are aiming toward the differences between behavioral economists and Austrians but I don’t see where you have gotten to the part that “tends to be controversial” yet although I am confident you could get there easily and probably will.

In my experience the presence or absence of humility varies much more by individual, than by ideology. And suggesting otherwise undermines the very humility you are trying to assert here.

“I assume you are aiming toward the differences between behavioral economists and Austrians…”

No, not really. No one group does this or doesn’t do this (at least in economics). Sometimes people will slip and forget. Sometimes they won’t.

The “controversial” comment was directed more toward those who will claim the rationality assumption doesn’t hold or make sense (for example, Phishing for Phools) or some sociologists who would argue that people’s actions are entirely a product of their environment rather than any conscience action on their part. It was a general comment, a recognition that the assumption I made (people are generally rational) is not without its detractors; it’s not an iron-clad law.

“Are there really people who people who are arguing that people don’t act based on the information they believe they possess and towards goals they understand themselves to intend? ”

We tend to see this line of thinking a lot in political science and sociology, but it is hardly exclusive or even necessarily a feature of these. Certain political philosophies, such as socialism and nationalism, tend to make this assumption. Bernie Sanders and Elizabeth Warren argue this all the time. It was the basis of Trump’s and Clinton’s presidential campaigns.

You are defining an act as rational anytime the actor BELIEVES that it advances his purposes. That is reasonable enough, especially since you are clear about your definition, but it sets a very low bar for rationality.

Behavioral economists, like the authors of “Phishing for Phools” are using a different and much more restrictive definition for rationality. They want to define an act as rational only if the the logic behind it is sound enough that it really does advance the actor’s purposes. That is reasonable enough but since, as Kahneman showed, all humans use heuristics that sometimes result in illogical decisions, that sets a very high bar for rationality.

It’s not that they disagree with you that people act on the basis of information they believe they possess toward goals they intend. It’s that they want to restrict the use of “rationality” to cases where the actors logic is sound.

This is much more a controversy about which is the most useful definition than it is about how people act.